2MX Organic: A "free look" at a transaction carried out by France's best retail operator in the organic food space (Disclosure: Yes, it's a SPAC!)

Disclaimer: We are shareholders of 2MX Organic. 

At DK Value we like a good old low risk, high reward set-up. Usually, it takes the form of high-quality companies with good growth potential trading at significant discount to intrinsic value. However, when we have lots of cash sitting around, it can look like 2MX Organic, a French SPAC listed in December 2020 with the purpose of acquiring a leading distributor or a consumer goods player benefiting from the shift to more organic and sustainable food.

Yes, we know that between dilution, bad incentives and record-high business valuations, SPACs are a usually a terrible value proposition. However, when the SPAC’s CEO, Moez-Alexandre Zouari, in addition to its founder shares, buys 10% of the company for EUR30m at the IPO price (EUR 10), we take notice and dig deeper. 

Enlabs: Why shares are worth at least SEK60, 50% above Entain’s public offer

Disclaimer: We own 0.1% of Enlabs’ capital. You can find our initial investment case (28 July 2020) on this blog as well. 

We originally intended to use this platform to 1) share our point-by-point rebuttal to the 6 arguments laid out by Enlabs’ Independent Bid Committee’s (“IBC”) in favor of Entain’s SEK40 public offer [1] and 2) ask Enlabs’ shareholders not to tender their shares during the acceptance period (21 January – 18 February 2021). Then news came out yesterday that Hans Isoz, Enlabs’ 6^th biggest shareholder, had rallied enough shareholders to block the transaction, which is conditional to a 90% acceptance rate [2]. This is a very welcomed development, and we commend Mr. Isoz for stepping up for all Enlabs’ shareholders.

We hope with the following to provide a framework as to the extent to which Entain’s offer undervalues Enlabs. Importantly, we show why Enlabs is worth at least SEK60 per share (50% higher that Entain’s bid), even under the IBC’s flawed valuation methodology.

Enlabs - high tech, high growth, low price

Disclaimer: We are shareholders of Enlabs AB.

NB: Enlabs is listed in Sweden while its financial reporting is in Euro and under IFRS 16. All operational figures are therefore stated in Euros (EUR) and share prices are stated in Swedish Krona (SEK). The same applies for Global Gaming 555, mentioned later. The EUR/SEK exchange rate used in this write-up is 10.31.

Summary

Enlabs is the biggest gambling operator in the Baltics with a market capitalization of SEK1.39bn. It derives 94% of its EUR40m revenues from online operations where it has a 25%+ regional market share. Online penetration in the region is still low, in the high-teens range (vs. 40%+ in some Western European countries) but growing +15% per year thanks to excellent broadband and 4G coverage. We believe the company can disproportionately benefit from this secular tailwind thanks to its unique proprietary technological platform and the local restrictions on gambling advertising favoring incumbents’ brands. This moat currently translates into 30% EBITDA margins, little need for capital reinvestment and therefore a 90% ROIC ex-goodwill. 

A true asset light compounder, we think the company has a clear path to an 18% FCF CAGR, reaching EUR19m in 2024. Applying an 8% FCF to EV yield in 2024 leads to an intrinsic value of SEK48 per share, or a 21.5% IRR on capital invested from current levels (SEK22 per share). This does not include the optionality of entering neighboring markets (such as Finland, Belarus or Sweden), where we think the company is very well positioned. This could add north of SEK10 of intrinsic value per share. Lastly, insider ownership is high with the Chairman owning 21% of the company. He has significant knowledge and experience growing gambling operations in the Baltics and is involved in the day to day operations of the business.